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Measuring the natural rate of interest in a commodity exporting economy: Evidence from Mongolia

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  • Doojav, Gan-Ochir
  • Gantumur, Munkhbayar

Abstract

This paper examines the fundamental drivers of the natural rate of interest in a commodity-exporting economy (Mongolia) based on a structural New Keynesian model that incorporates external factors such as demand for commodity exports, commodity price, and FDI, using Bayesian techniques. Our empirical analysis resulted in the following novel findings. First, we find evidence of transitory shocks to the real natural rate of interest. Second, we show that the estimated real natural rate of interest is procyclical. It declined during 2012–2016 and has been gradually recovering since 2017. The monetary policy stance has been neutral since mid-2017. Third, due to the characteristics of the Mongolian economy, the natural rate of interest remains at double-digit, thus explains high interest rate in the country. Fourth, our findings highlight that external shocks (i.e., spillovers from the global commodity market) are the main determinants of the real natural rate of interest, as they account for 40 percent of its fluctuations. Consequently, the external shocks mainly transmit through the equilibrium real exchange rate.

Suggested Citation

  • Doojav, Gan-Ochir & Gantumur, Munkhbayar, 2020. "Measuring the natural rate of interest in a commodity exporting economy: Evidence from Mongolia," International Economics, Elsevier, vol. 161(C), pages 199-218.
    • Handle: RePEc:eee:inteco:v:161:y:2020:i:c:p:199-218
    DOI: 10.1016/j.inteco.2019.12.001
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    Cited by:

    1. Doojav, Gan-Ochir & Luvsannyam, Davaajargal & Enkh-Amgalan, Elbegjargal, 2023. "Effects of global liquidity and commodity market shocks in a commodity-exporting developing economy," Journal of Commodity Markets, Elsevier, vol. 30(C).
    2. Gunbileg Ganbayar, 2021. "Analysis of External Debt Sustainability in Mongolia: an Estimated DSGE Approach," Sustainability, MDPI, vol. 13(15), pages 1-17, July.
    3. Sheng Zhu & Ella Kavanagh & Jun Gao, 2024. "The natural real rate of interest and monetary policy: New evidence for the US," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 3023-3039, July.

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    More about this item

    Keywords

    Natural rate of interest; Monetary policy; Open economy macroeconomics; External shocks; Bayesian analysis;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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